CFA Practice Question
What is a filter rule?
A. A test of the weak-form EMH
B. A test of the strong-form EMH
C. A test of the semistrong-form EMH
Explanation: A filter rule is a decision rule for technical analysis, which assumes that security-market information can be used to generate above average profits. With a filter rule, an investor trades a stock when the price change exceeds a filter value. For example, if there is a 5% filter, a technician would buy the stock if it rose by more than 5% because of anticipated further gains. If the stock fell by more than 5%, a technician would sell the stock if it was in his portfolio, or perhaps even sell it short, to take advantage of anticipated further declines.
User Contributed Comments 7
| User | Comment |
|---|---|
| ylepape | A filter rule is a trading technique : a trader does not bulid such a rule to please and test ideas of academics, but to trade and make P&L ? No trader cares about EMH ! |
| jpducros | Does filter rule support or not the weak-form hypothesis ? |
| jpducros | ok, it is a form of trading rule test that support the Weak-form EHM. |
| mc42086 | Yes it would support weak form, because the filter rule assumes that there are above average profits to be made. |
| bhups | filter rule is not the same as filtering/screening stocks |
| Rohule | is this the DOW theory? |
| ctschro | it would not support weak-form EMH for the reason given by mc42086. weak-form EMH assumes that above-average profits canNOT be made based on technical and trading indicators alone. however, fundamental analysis could still outperform (given semi-strong does not hold). |